Saturday, February 20, 2016

MDs/WTDs crossing 70 years of age mid-tenure lose their jobs

The Bombay High Court has held that Managing/Whole-time Directors (“EDs”) will lose their jobs if they cross 70 years of age during their tenure of appointment. This is the new position of law under Section 196(3)(a) of the Companies Act, 2013, which came into effect from 1st April 2014, and which was not so under the corresponding Section 267 of the Companies Act, 1956. (Note:- It was misleadingly reported in media that all directors, whether Executive or Non-executive, will so lose their jobs).

The implications of this decision are serious, even if in narrow cases of soon-to-be-septuagenarian EDs. There may be several such persons who may already have crossed 70 years on or after 1st April 2014. All of them would be deemed to have lost their jobs. 

The facts of that case will make the position clearer. A Managing Director was appointed for a term of 5 years with effect from 1st August 2012. He had crossed 70 years halfway of his term on 11th November 2014. On that day, it was held that he is deemed to have vacated his office as MD. The Court reversed the decision of the Single Judge who had held that such an MD should be allowed to complete his full tenure. 

The contention of the MD that this section cannot be held to have retrospective effect was rejected.

Section 196(3)(a) contains a new disqualification. It provides that “no company shall appoint or continue the employment of any person as managing director, whole-time or manager who (a) is below the age of twenty-one years or has attained the age of seventy years..”

This is not merely a transitional issue. This applies to persons who were appointed whether before or after 1st April 2014. Thus, there may be EDs who are appointed before 1st April 2014 for a term at a time when such disqualification did not exist in law. Such persons would lose their jobs if they crossed, after 1st April 2014, 70 years of age. It would also apply if the appointment were made after 1st April 2014.

The decision applied to a case where the ED crossed 70 years of age midway through his tenure. What about a person who is already more than 70 years old when he is sought to be appointed? The proviso to Section 196(3)(a) states that he can be appointed by passing a special resolution and indicating in the explanatory statement the justification for appointment of such person.

The drafting of Section 196(3)(a) and the proviso thereto leaves much to desire. Can such an appointment be made if the person is expected to cross 70 years during his term? Can a special resolution be passed in advance so as to permit such ED to continue as such even if he crosses 70 years midway of this term? Applying the Section/decision literally and strictly, this is not possible. A fresh special resolution during the term would have to be passed to ensure continuation. The proviso to Section 196(2) makes this more difficult as it prohibits re-appointment of EDs earlier than one year of expiry of their tenure.

However, considering the peculiarities of such a situation, it is submitted, with due respect to the court, that if the substantive requirements of passing special resolution/giving such justification are complied with, the Section deserves a liberal interpretation. Thus, such an ED ought to be allowed to complete his term. However, it is better that a due clarification or relaxation is issued by the Ministry of Corporate Affairs, or an amendment made to Section 196.

3 comments:

Anonymous said...

But the said order has been stayed for 6 weeks.

Aditi said...

is there a confirmed stay on the order? Is there any link to such order?

vswami said...

@Anonymous
Any Update, on further development after the last reported 'Stay' for 6 weeks, over 5 months ago?
The info.,may be of relevance to the set of amendments of the company law recently notified. Refer posted comment @ Linkedin > new Corporate Law - Latest (spate of) changes wrt https://indiacorplaw.blogspot.in/2016/08/amendments-to-companies-incorporation.html !